Question

The Lancaster Corporation’s income statement is given below.

b. What would be the fixed-charge-coverage ratio?

Lancaster corporation
Sales	\(246,000
Cost of goods sold	122,000
Gross profit	\)124,000
Fixed charges (other than interest)	27,500
Income before interest and taxes	\(96,500
Interest	21,800
Income before taxes	\)74,700
Taxes (35%)	26,145
Income after taxes	$48,555

Short answer

The fixed charge coverage of Lancaster Corporation is 2.52.

Step-by-step solution

Fixed charges coverage ratio 

Fixed charges coverage ratio is computed to know the company’s ability to cover its fixed expenses out of the profits.

Calculation of Fixed charges coverage ratio 

$\begin{array}{rcl}\mathrm{Fixed}\mathrm{charges}\mathrm{coverage}\mathrm{ratio}& =& \frac{\mathrm{Earning}\mathrm{before}\mathrm{interest}\mathrm{and}\mathrm{taxes}+\mathrm{Fixed}\mathrm{charges}\mathrm{before}\mathrm{tax}}{\mathrm{Interest}\mathrm{expense}+\mathrm{Fixed}\mathrm{charges}\mathrm{before}\mathrm{tax}}\\ & =& \frac{\$96,500+\$27,500}{\$21,800+\$27,500}\\ & =& 2.52\end{array}$